Residential Status for Income Tax: You can be deemed resident, taxed in India even if you haven't spent even one day in the country: Here's how

The recent changes in the Income-tax Act, 1961 has made an individual's income taxable in India even he has not spent a single day in the country. Here is how that can happen..

Residential status of an individual for tax purposes is usually based on the period of stay in India during a financial year. Residency rule under the income tax law requires an individual to be present in India during the relevant year for a minimum of 182 days to qualify as a resident. Further, in certain cases even presence in India for a cumulative period of 60 or 120 days in a single financial year can make the person an Indian tax resident, subject to certain conditions.

Thus, presence in India for a minimum number of days has always been an essential precondition for an individual to qualify as a tax resident of India and to expose certain amount of his/her global income to tax in India.

Now the question is can someone be treated as a tax resident of India even if he/she has not spent a single day in India during a year? The answer is yes. Let us see how.

New concept of deemed residency

In the Union Budget of 2020, a new residency rule has been introduced with effect from financial year 2020-2021. This rule applies only to Indian citizens, who have income from Indian sources in excess of Rs 15 lakh in a financial year. Such Indian citizens are deemed to be tax residents if they are not liable to tax in any other country by reason of their domicile or residence or any other criteria of similar nature. As a departure from the normal rule, the new provision seeks to treat an individual as an Indian tax resident based on citizenship rather than on residence or period of stay in India.

Citizenship is to be determined on the basis of Indian Citizenship Act, 1955 ('ICA'). Section 3 of ICA lists various criteria such as birth, descent and registration based on which a person can become an Indian citizen. However, all NRI, PIO and OCI card holders may not be citizens of India. Application of section 3 of ICA will have to be checked to determine the status of their Indian citizenship.

Who are the targets of this new rule?

Tax laws in many of the countries around the world seek to tax an individual based on minimum period of stay in that country during the relevant taxable period. An individual may avoid becoming a tax resident of a country by limiting his/her duration of stay below the threshold number of days and thereby, reducing or avoiding tax liability on substantial portions of their income in that country.

In certain cases, persons can meticulously plan and spread their stay across two or more countries in such a way that they don't cross the threshold number of days in any of these countries. As a result, such individuals will not qualify as a tax resident of any country in the world. By virtue of such tax planning, a significant portion of the global income of such individuals may either remain untaxed or subjected to a much lower level of taxation. In the world of taxation, these individuals are referred to as "stateless" persons.

Bilateral tax treaties entered into by countries, which usually address the problems of double taxation of the same income in the hands of a person in multiple countries, do not deal with this peculiar case of double non-taxation of stateless persons.

More specifically, there is a growing trend of Indian high net-worth individuals (HNIs) moving their residence between multiple countries outside India. Many of these countries offer long-term residency permits and tax concessions based on certain investments made in those countries. The new concept of deemed resident is in the nature of an anti-abuse law that seeks to address this mischief by treating such 'stateless' Indian citizens as tax residents of India.

Scope of income taxable in India

As a matter of relief to such individuals, a "deemed resident" will be treated as resident but not ordinarily resident (RNOR). Thus, the entire global income of the individual will not be subjected to tax in India. Apart from income accruing or arising or received in India, any income accruing or arising outside India will be taxable in India in the hands of such "deemed resident", only if the same is from a business controlled in or a profession set up in India.

Significantly, any individual who is treated as a "deemed resident" may not be eligible to avail benefits under any tax treaty entered into by India, as he/she may not qualify as tax resident of any other country. However, he/she may still be able to avail the benefit of foreign tax credit (FTC) in India of some of the taxes paid in other countries on income, which is also getting taxed in India.

This is because the qualifying condition under section 6(1A) of the Act is that the individual should not be liable to tax in another country based on residence. However, he could be liable to tax in elsewhere based on other criteria (usually source-based taxation). For instance, royalty or fee for technical services may be subjected to taxation in the source country (where payer is located) through deduction of withholding tax. If the same is again subjected to tax in India, based on deemed residency, then FTC can be availed in India.